Some business owners believe that an effective exit strategy will be to hire a CEO and become a passive owner, or to sell the business on a note over a significant period of time to a key manager with little money down. Some people rationalize that it will be easier and they will save on a business broker or investment banker's commission. Under the right circumstances this may be a good strategy for some people and businesses, but it is often more risky and time-consuming than people anticipate. Without more skin in the game, what happens when times get tough and the hired CEO or key manager gets tired of running the business? What will cause them to stay long-term and be as committed as an owner who has made a substantial investment in the company?

Generally Codiligent believes that business owners who engage a quality business broker or investment banker to help them market their business and locate, screen, and negotiate a sale to a financially qualified outside buyer will do far better financially and with less risk, even after paying a business broker's commission, than selling to an insider.

Some business owners pursue a sale to a key employee out of loyalty to that person who has contributed to their success, and would feel guilty if that key employee was laid off or their wages were reduced by a buyer. While business buyers all have different motivations and plans, more often than not they will want to retain key employees and will not want to risk losing key staff by changing their compensation structure.

Following is wise advice from Benjamin Graham, Warren Buffett's mentor and the author of “The Intelligent Investor”:

“Do not let anyone else run your business, unless (1) you can supervise his performance with adequate care and comprehension or (2) you have unusually strong reasons for placing implicit confidence in his integrity and ability. For the investor this rule should determine the conditions under which he will permit someone else to decide what is done with his money.”

Kaufman does a nice job of showing a formula to isolate the variables that lead to earning a billion dollars by looking at after-tax profits generated by customers, the number of customers served and a person's share of ownership in a company. However, his formula significantly over-states what would be required to become a billionaire because he only takes into consideration a business' earnings, not the value generated by those earnings. In fairness to Kaufman he does describe, in an oblique way, how the stock market may value those earnings.

I know the purpose of his formula isn't to figure out how quickly someone could become a billionaire, but rather the level of profitability of customers over time and the number of customers served, to determine what would be required to earn a billion dollars. However, under his formula, if you were earning, on average, $50 million a year it would take you 20 years to earn a billion dollars. While this is all theoretical because no business starts out earning $50 million a year, if a business would sell for 15x earnings then $50 million in earnings would represent a business value of $750 million. So, rather than it taking 20 years of $50 million in earnings, it would really only require 5 years of earnings plus the value of those earnings to total $1 billion.

OK, now that we've cleared that up all you need to do is figure out how to generate $50 million a year in earnings and in five years you can be yachting in the Mediterranean.

Private equity groups (PEGs) are firms that buy or invest in companies that, most often, are not publicly traded. There are a few thousand that invest in US-based companies, and each have their own investment style, criteria, method of investing (providers of growth capital, management buyouts, turnarounds, etc.), and industries and sectors of interest. What the majority have in common is that they invest in mid-market or larger companies. Because of this, some small business owners are surprised when I, as a business broker, suggest that pursuing private equity buyers will be part of a comprehensive business marketing strategy.

Codiligent business brokers has done significant research to determine which PEGs are willing to invest in small companies (defined as less than $20 million in revenue), and their acquisition criteria. As a result Codiligent business brokers has about 300 PEGs in its database that will consider small companies. However, the majority of these PEGs have as one of their minimum acquisition criteria at least $1 million in annual Earnings Before Interest Taxes Depreciation and Amortization (EBITDA), so if your business has less than $1 million in EBITDA there will likely be very few PEGs who will be interested in an acquisition.

The following link provides profiles of some of Codiligent's featured buyers' acquisition criteria, which includes some PEGs and will provide a better idea of what types of businesses they are looking for: Codiligent's featured business buyers.

If you have questions about what type of buyers may be interested in your business please give Codiligent business brokers a call to discuss your business at 888-324-5888.

A common question posed to business brokers and investment bankers is: what is Due Diligence, and what are business buyers looking for in the Due Diligence process? What it entails and how difficult the process will be often largely depends on how good of a job a business broker has done with packaging the business.

Due Diligence is simply the process of a buyer investigating the details of a business. This may include both discovery of previously undisclosed information about a business and the verification of information already presented. During Due Diligence a Buyer will typically look at all aspects of a business including the market for the company’s products and services, the characteristics of the products and services, how the business is marketed, the sales process, operations, purchasing, information on customers, personnel, and financial performance and reporting.

At Codiligent we answer most of the high level material buyer questions in the confidential information package. This enables formal due diligence on Codiligent-represented businesses to be primarily a verification process, rather than a discovery process. Many business brokers don’t do this, and the result is that there is too much discovery of new information in due diligence causing buyers to either terminate the transaction or re-negotiate price and terms as a result of learning new previously undisclosed information.Following is a webinar put on by USC’s Marshall School of Business on September 18, 2009 that discusses Due Diligence. While this information is geared toward buyers of larger businesses, it will provide a better idea of what buyers look at when conducting Due Diligence.